TBY talks to Enrique García, Executive President of the Development Bank of Latin America (CAF), on the importance of regional economic diversification and the need to improve corporate governance.

What should be the role of multilateral organizations such as CAF in the current worldwide context of economic crisis and recession in the US and Europe?

At a time when the global economy is going through a period of uncertainty, Latin America is still producing good results in terms of growth and macroeconomic stability, despite the external vulnerabilities of the European crisis, the slow US recovery, and the deceleration in China. This is due to a combination of factors, both external and internal, and the sensible macroeconomic policies implemented in most Latin American countries. This situation suggests major challenges for the region that require the construction of integral agendas that include four crucial issues simultaneously: macroeconomic stability, microeconomic efficiency, social equity, and environmental balance. The region must reach growth rates higher than they are currently, to allow for an accelerated productive transformation process, higher levels of investment, and a more solid level of institutionalism. In that sense, CAF assumes an important role in assisting its member states in their development strategies, not only with financing but also with knowledge and technical support, for the capitalization of a favorable implementation of an integral agenda with a long-term vision that is national as well as regional.

What are the essential elements that both Ecuador and Latin America need for development over the medium and long term?

Among the challenges that the region will face in this new situation, it is vital to give up the concentration on raw material exports and diversify the economy. This demands that the region doesn't fall into complacency and focuses on an ambitious agenda to overcome the structural weaknesses that it still faces. Particularly important is the productive transformation that is going on through sustained increases in productivity and profits in terms of competitiveness. In this direction, a fundamental challenge is value adding for the natural advantages that the region possesses, through technological and human capital development. Another no less important challenge is the adaptation and development of infrastructure for regional integration, in order to boost the advantages that the boom in commerce with Asia is offering. The challenge is to channel resources by increasing savings and domestic investment, as well as the intelligent raising of foreign investment. To achieve these objectives, the region must keep working on improving the business environment for the private sector and the quality of its institutions. Although the reduction of poverty is one of the biggest accomplishments that Latin America has achieved in the past years, there remain important shortcomings, mainly in terms of income distribution. In that sense, it is indispensable to work on a wide and innovative social agenda that allows for a reduction in the high inequality levels that can still be found in the region.

“Over the past few years, Ecuador and Latin America have seen positive results in terms of poverty reduction."

What are the main objectives of widening CAF's credit portfolio and how can Ecuador benefit from this process?

The projects promoted by CAF in Ecuador are framed inside the investment priorities established by the government in key sectors for the development of the country, looking, above all, to improve quality of life. CAF is especially aiming to strengthen the economic and social integration of the regions and social sectors that lag behind. From 2007-2011, CAF approved $4.2 billion for its operations in Ecuador; at the end of 2011 the total portfolio reached $2.5 billion, which represented around 15% of CAF's total portfolio.

How can CAF contribute to the achievement of Latin American integration that includes social, political, cultural, and environmental aspects?

In this stage of great challenges for the region, CAF contributes in a pragmatic way to the efforts of regional integration, conceiving it as a decisive factor for the achievement of a relevant presence in the global economic and political context. The institution is one of the largest multilateral financing sources in Latin America today, and has a special emphasis on projects that promote regional integration. Its integral agenda for sustainable development aims at achieving a high growth rate that respects cultural diversity and the environment. These are indispensable conditions when facing collective regional challenges and problems with coherence and clarity. CAF's approvals in favor of Latin America over the last five-year period reached $45 billion. In 2011, approvals worth more than $10 billion were directed to financing economic and integration infrastructure (50%), social and environmental development (30%), and the productive sectors (20%). This integrated vision of development translates into complementary activities to our financial work, aligned with the objective of generating knowledge to provide technical support and contribute to the institutional strengthening of its member states.

What is your opinion about the efforts made by Ecuador to reduce poverty levels?

Over the past few years, Ecuador and Latin America have seen positive results in terms of poverty reduction, due to their favorable economic performance. These advances make it imperative to continue working on a wide and innovative social agenda that allows for deepened integration.

What strategies do you intend to implement in 2012 to promote productive activity and support SMEs in Ecuador?

CAF's contribution to SMEs is through projects that help promote sectorial development and competitiveness, and at the same time promote export diversification and generate direct and indirect employment in rural communities that fall below the regional poverty line. An example of this in Ecuador is the creation of competitive advantages for the development of SMEs in Cuenca. This will strengthen the electrical appliance and furniture industries, which bring together a significant amount of developing companies, by articulating work between the national and local government, the entrepreneurial sector, and the academic sector of the city.

How does CAF support the regional capital market development?

Latin American economies have developed their capital markets and adopted regulatory frameworks that include corporate governance best practices, which are factors promoting stock market development. Good corporate governance helps companies to operate at higher efficiency levels, attract capital, and protect themselves from corruption and bad management. This practice makes companies become more responsible and transparent, and reinforces investor trust in public and private enterprises. Fulfilling our commitment to sustainable development and regional integration, CAF has been promoting the Program of Corporate Governance, destined to promote best practice throughout the region. Through the promotion of best practices we look to contribute to responsible competitiveness at a company, sectorial, and macroeconomic level.

How does CAF plan to facilitate the development of the stock market in Ecuador?

The CAF support policy for stock market development is framed by regional integration and market efficiency, by supporting its country members in the creation of public policies, as well as their formalization and implementation. CAF, together with the Quito Stock Exchange and with the institutional sponsorship of the Financial Analysis Unit, recently presented a report generated by a project on the modernization of stock markets and the prevention of money laundering. To conduct this study, prominent national and foreign consultants were selected who carried out research into the laws of different markets and the practices and reports demanded by financial intelligence entities. On this basis, two documents were elaborated as references in the prevention of money laundering for the stock market. Additionally, CAF has promoted other projects in Ecuador to modernize the stock market such as the creation of the Corporate Governance Academic Unit, with the objective of deepening stock market development through the implementation of processes and mechanisms that improve efficiency and effectiveness as well as generate investor trust. The program has also allowed for the creation of an academic network supporting good corporate governance and the promotion of a stock market culture.

© The Business Year - July 2012